“Since the inventory in a product development process is not a physical object but information, it is virtually invisible.”
Donald R. Reinertsen
Imagine a bike store. Full of new, shining vehicles. If you looked for a bike, nothing better could have happened to you that day when you came into this store. Of course, all of them are too expensive, but well… that’s the cost you can agree to accept.
Imagine the same shop in a year's time. The same bikes, some of them covered by dust already, some of them with fingers marks – probably someone touched them right before you came in (but actually nothing more happened). They look a bit ugly – in the store just a few miles away you saw the newest design, but you decided to visit this place anyway – the seller promised so much a year ago and maybe you still feel a bit of a sentiment. You took a look at the label. Wait, what? You expected a discount at least, but it seems the price went higher since the last time you’ve been here.
“You know… labor cost didn’t fall down from the last time and we really need to sell these bikes. Don’t you want one? It’s still a bike, you can use it. You say, you saw a newer version in another shop? That’s a shame, you told us last year you need a bike, so what’s the problem?”
Imagine the warehouse full of bananas… Bananas in the country where people actually don’t like bananas anymore and they fell in love with apples. Bananas, apples, grapes… what’s the difference – all of them are fruits, don’t they? So why do you complain?
Stop your imagination for a moment, cause you know, where it’s all leading to – to the inventory problem.
The idea of inventory originates from manufacturing systems and relates to the raw materials ready for reuse (in goods production) and resale or goods ready for sale.
The reasons for keeping the inventory are:
seasonal demand – in the time of high demand, the raw materials available on the market may be limited, hence we protect ourselves from running out of them, which is related to…
… hedging against uncertain level of demand or variation to production demand – when we don’t know, how much of ready products will be required by customers and we don’t want to lose opportunity to sell as much as possible;
economies of scale & (possible) quantity discount – there is always a chance that purchasing in big bulks will earn a discount from vendor and will be cheaper in terms of transport and overheads costs;
advantage of raw materials price increase – when the price of already bought materials goes up, our margin increases;
value appreciation – some goods just have to be kept in the inventory as they gain value over time (e.g. wine)
The inventory in all kinds of knowledge work (software development, system maintenance, accountancy, HR, finance etc.) is invisible. This invisible yet actually very real inventory sits either in the folders or within people’s heads.
Each work, which is:
started and “in progress”
started and forgotten
never started, but awaiting for ages in the backlog…
…is your inventory.
Work in progress or design in progress are your inventory.
And there are also certain risks related to maintaining high level of inventory*:
poor inventory turnover – inventory turnover is one of the main ratios for inventory accounting, which says, how many times in a given reporting cycle company has sold and replaced inventory; if a company is not able to sell the goods produced out of raw materials, it cannot prevent inventory buildup and loose the proper cash flow.
If you produce the requirements only, if your development and testing last forever without hopes to finish – you are not able to turnover your inventory, meaning you are not able to deliver (=sell) your product and cash the profits.
high cost – inventory cannot be kept for free, there are a bunch of costs associated with that: labor cost to manage inventory, transport cost to move it, warehouse cost, sometimes insurance cost.
The more work in progress you produce, the more additional costs it consumes. Intangible inventory does not require warehouses or trucks to transport materials, but it requires people’s time and attention and neverending management. Additionally, if you use developers licenses, count them too.
loss or damage – some inventory can go obsolete after a certain time; perishable food can become rotten or spoiled.
If requirements are not translated into the product, if a developed piece of work is not tested, if you are blocked before moving to production, there is a very high risk that you will not meet the initial customer needs and the value delivered will have to be scrapped.
time wasted for strategic planning meetings – more inventory requires more time spent on inventory management, meetings to agree, what to do with it and how to communicate to suppliers, etc.
Related directly to the costs – the more inventory you have, the longer the meetings are, the more senior managers have to consider them, the more impediments and dependencies you create. Also constant status reports and communication to customers awaiting their products is not only time consuming, but simply… embarrassing.
lower liquidity – cash is not available immediately, as it stucks in inventory.
This seems to be purely manufacturing problem, but in knowledge work case you loose the employees time and this time can be easily translated into money. The longer development team stuck in the project, the less “liquid” it is in terms of picking up the new challenges (unless we continue building up the work inventory levels – and vicious circle closes).
shifting customer demand – the product customer wants today may not be the product customer requires tomorrow.
Again related to the “loss or damage” point, when a customer waited so long for the product that requirements changed a few times or became obsolete.
* inspired by:
Just In Time (JIT) Production
Just in Time is one of the basic concepts of lean manufacturing, which aims to zero inventory and high quality, and utilizes the pull system.
Below short summary and comparison of what JIT means in manufacturing and how its elements fit the knowledge work.
What about the numbers?
The theory we've just covered, and gut feeling are really nice things, but when it comes to the discussion with your stakeholders nothing is more persuasive than pure numbers.
That’s why it is importnant to translate your intangible inventory into very tangible data and hard dollars.
To be continued…